The US Dollar Index weakens further, can the Euro against the US Dollar reach a new high again?

The foreign exchange market in December is playing an interesting tug-of-war. The US Dollar Index continues to be under pressure, while the euro against the dollar is on the rise. As of December 3rd, the US Dollar Index is at 99.24, down for nine consecutive trading days; the euro against the dollar has risen for the eighth day to 1.1637, with market sentiment clearly turning bearish on the dollar.

Federal Reserve Rate Cut Expectations Boost the Euro

The fundamental reason for the dollar’s weakness points to the Federal Reserve’s policy stance. According to the CME FedWatch Tool, the market currently prices an 89.2% probability that the Fed will cut interest rates by 25 basis points in December, with two more rate cuts expected in 2026. This ongoing expectation of easing is exerting sustained downward pressure on the dollar.

Historically, December has not been a friendly month for the dollar. Data shows that over the past 10 years, the US Dollar Index has declined in December 8 times, with a probability of 80%, and an average decline of 0.91%, making it the worst-performing month of the year.

Central Bank Policy Changes as a Key Turning Point

The future trajectory of the dollar faces two major variables. The first is the Bank of Japan’s interest rate hike trend—latest market expectations have increased the probability of a rate hike by the Bank of Japan in December to 80%, which will further strengthen the relative interest rate differential supporting the European currencies.

The second involves changes in US policy leadership. US President Trump recently indicated the possibility of appointing Chief Economic Advisor Hasset as Federal Reserve Chair. According to Van Luu, head of global forex at Russell Investments, under Hasset’s leadership, the Fed is likely to adopt a more dovish stance, which will lead to further weakening of the dollar. The euro against the dollar is expected to break through this year’s high of about 1.19, reaching a four-year high.

Multiple Factors Combine to Impact

Steven Barrow, head of G10 strategy at Standard Bank, pointed out that the combination of the Bank of Japan’s rate hike, leadership adjustments at the Federal Reserve, and potential tariff policy impacts will form a “triple strike” against the dollar. This impact “even if not fully realized in the last weeks of this year, will inevitably erupt in early 2026.”

Deutsche Bank macro strategist Tim Baker provided a quantitative perspective: the US Dollar Index is expected to fall back to near the lows of the third quarter, implying about a 2% downside potential for the dollar index. This forecast aligns with the systemic pressure on the dollar during the traditionally weak month of December.

The forex market’s balance has clearly tilted toward the euro, and the gathering strength of the bulls suggests that the story of a weakening dollar may still have more to unfold.